ISM Manufacturing Index – Sufficient Reason For Further Rate Cut?

ISM Manufacturing Index – Sufficient Reason For Further Rate Cut?

The Federal Reserve realized its rate-cut strategy back in July of 2019. Owing to the additional pressure from the White House, the interest rates were further cut down a few weeks ago as well. The indicators were clearly pointing towards a slower economy, however, the risk of an all-out recession was not expected to be in sight anytime soon.

ISM Manufacturing Index Drops To Lowest In 10 Years

Yesterday’s data for manufacturing index by the Institute of Supply Management has, however, shaken the markets with a major plot-twist. Dropping to its lowest level in the past ten years, the effects of the revealed data were not confined to U.S dollar in the forex market. Stock markets across the globe, as well as the oil prices, received a major blow as per the reports on Tuesday, October 1st, 2019.

The current figure of 47.8 marks the lowest level for the manufacturing index since June of 2009. All of the prominent sub-indices including new orders, production, and employment have been reported under 50, lying in the contraction zone.

The Rising Risk Of Recession

But that is not all that hints towards imminent recession and a need to further cut down the interest rates. According to the MSCI USA index, the U.S stock market has also experienced the sharpest fall in over a month.

Blend this data with the ongoing U.S – China trade war that doesn’t appear to be near an end anytime soon, and it would be fair to conclude that Fed’s lenient monetary policy in an attempt to strengthen the economy is perhaps a dubious strategy at the very best. In light of this trade war and the recent figure for manufacturing index, Deutsche Bank AG’s chief economist, Mr. Torsten Slok has stated the risk of recession to be closer than what we had previously thought.

Recommendation For Traders

For investors, however, the ISM manufacturing index data must be interpreted with caution. While the figure (47.8) lies in the contraction zone, ISM itself has taken a stance that since it is above the 42.9 level, the indication towards an overall expanding economy must not be ruled out. In simpler words, while the data is certainly not good news as represented by the way that financial markets responded to it, it still only points at a slower expansion of the U.S economy, but an expansion, nonetheless.

So, the million-dollar question remains the same, “Does the Federal Reserve has sufficient data, reason, and rationale to further reduce the interest rates?”. Especially considering that the rates are already approaching record lows, what might be the strategy for FED to spark the decelerating economy of the United States of America?

By Michael Harris
Specialising in economics by academia, with a passion for financial trading, Michael Harris has been a regular contributor to Invezz. His passion has given him first hand experience of trading, while his writing means he understands the market forces and wider regulation.

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